You Can Strip Your Corporation of Valuable Assets Tax-Free
Suppose you are concerned about potential lawsuits and you have appreciated real estate in your operating corporation. Perhaps the real estate is in the corporation because, when you took title, you didn’t realize (or care) that it would be exposed to creditors. Or maybe you wanted to avoid paying sales tax if you owned the real estate personally and leased it to the corporation. Either way, you’re not happy about it now. You want to get the real estate out of the corporation.
The problem? Deeding the real estate from the corporation to yourself is treated as a taxable sale at fair market value, triggering a large tax liability.
A New IRS Solution
After seeking advice, you may discover a relatively new set of IRS Rulings that provide a solution. These rulings allow the transfer of appreciated real estate out of your corporation without triggering income taxes. When properly executed:
- You form a Parent Company.
- The Parent owns two subsidiaries:
- An operating corporation (your original business), and
- A real estate holding company that owns the property.
- The real estate is now separated from the litigation risks of the operating corporation.
Protecting Against Lawsuits
At this stage, the real estate is separated, but not yet protected. In many lawsuits, the plaintiff will sue both you and the operating corporation. Since you own the Parent (and the Parent owns the real estate company), a winning plaintiff could potentially seize the Parent and gain control of the real estate.
To prevent this, you must shift ownership of the Parent. Options include:
- Transfer to your spouse,
- Hold as tenants by the entireties with your spouse,
- Transfer to yourself as trustee of a trust for the benefit of your family.
These options insulate the Parent from seizure to satisfy a judgment against you.
Continuity of Operations
One of the strengths of this structure is that the operating corporation continues as before. It retains:
- All contracts,
- Licenses,
- The same identification number.
A potential downside: sales tax may be due on the lease of the real estate back to the operating company. However, there are techniques to avoid that sales tax, which are outside the scope of this article.
Conclusion
While there are technical issues and traps for the unwary, this strategy often provides a compelling way to separate and protect valuable real estate from corporate risks—while avoiding immediate income tax consequences.
